Treasury yields rise from lowest in more than a year

First of the Fed's renewed debt buybacks comes and goes

By

DeborahLevine

NEW YORK (MarketWatch) -- Treasury prices declined Tuesday, pushing long-term yields up from the lowest since at least April 2009 and reversing part of the prior session's gains, as stocks rallied and investors felt less need for the relative safety of U.S. debt.

The fall in prices came alongside the Federal Reserve's first formal purchase of U.S. Treasury debt since last year, in which the central bank bought $2.551 billion in bonds.

Treasurys had been under pressure earlier after economic reports showed U.S. housing starts and wholesale prices rose in July.

Yields on 10-year notes
TMUBMUSD10Y, +0.00%,
which move inversely to prices, rose 7 basis points to 2.63%. A basis point is 0.01%.

The yields touched the lowest since March 2009 on Monday.

Yields on 2-year notes
TMUBMUSD02Y, +0.00%
increased 1 basis point to 0.50%, still near a record low.

Thirty-year bond yields
TMUBMUSD30Y, +0.00%
rose 4 basis points to 3.76%, after having touched the lowest level since April 2009 on Monday.

The Federal Reserve Bank of New York purchased Treasurys maturing from 2014 to 2016, the first of a series announced by policy makers last week. The Fed is reinvesting cash from maturing mortgage debt back into the bond market to keep its balance sheet steady and buoy the economy.

The market rallied pretty significantly since the Fed's announcement of the purchases, which are done as open market operations. See Fed buyback results.

Otherwise, "we would probably have been more optimistic about the market's chances of continuing to rally after the first successful Fed operation," wrote strategists at Nomura Securities, one of the 18 primary government security dealers that trade directly with the Fed.

The Fed had been expected to buy between $2 billion and $3 billion in this operation. Dealers offered to sell the Fed $20.949 billion in debt.

Economic data

Weighing on demand for bonds, U.S. stock benchmarks climbed about 1.5% as earnings from Wal-Mart Stores Inc.
WMT, +0.44%
and Home Depot Inc.
HD, +0.08%
gave investors reason to focus on encouraging corporate financial results. Read about U.S. stocks.

The Commerce Department said earlier that housing starts increased slightly in July, but at a slower-then-expected rate. Also, the drop in the prior two months was steeper than previously estimated. Read about housing starts.

A separate report showed producer prices, tracking the rate of inflation at the wholesale level, rose 0.2% last month.

The wholesale-price data were unlikely to move the markets. The government reported late last week its July consumer price index, which investors care more about in terms of gauging inflation pressures and expectations.

Treasurys had been down before the data as investors seemed more comfortable shifting into assets deemed riskier, amid strong earnings reports and merger activity.

Treasurys showed little reaction to a third economic report, this one showing that industrial production increased 1.0% in July, more than expected. Read about industrial output.

On Monday, U.S. data on manufacturing and home-builder confidence piled on a surprisingly weak report on Japan's economic growth, driving long-term yields down by the most since early June. Read about bond yields on Monday.

Any profit taking in Treasurys is "unlikely to be a pattern with the economy slated to grow at 1% to 1.5% over the next two quarters and with very little positive movement on the jobs front," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners.

Against this backdrop, he recommends traders buy dips "as the deflation trade is coming in a very big way and we are targeting 2.25%" for 10-year notes' yields.

Investor survey

Investors continue to be underweight in bonds compared to their benchmarks, though only a net 34% expect higher long-term rates over the next year, according to a survey conducted by Bank of America Merrill Lynch earlier this month. That's down from a net 52% saying that in June.

While 73% of respondents expect below-trend growth and inflation, almost eight in 10 said a double-dip recession is unlikely.

The survey also found 55% of fund managers expect to see no change in the Federal Reserve's target interest rate until the third quarter of 2011.

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